Latest Fein PWG Comment
Another post to the SEC's "President's Working Group Report on Money Market Fund Reform (Request for Comment)" webpage was submitted by Melanie L. Fein of Fein Law Offices. She writes to Daniel Tarullo of the Board of Governors of the Federal Reserve System, "Your speech entitled "Shadow Banking After the Financial Crisis" delivered on June 12, 2012 continues the Federal Reserve's campaign of misinformation and misguided proposals concerning the role of money market funds ("MMFs") in the financial system. You attempt to fit MMFs into a description of the "shadow banking system" that simply does not reflect their activities and operations. MMFs are not shadow banks. They lack the attributes of either banks or shadow banks. The institutions that are most heavily engaged in "shadow banking" activities are banks themselves and their affiliates, as I show in my paper "Shooting the Messenger: The Fed and Money Market Funds," a copy of which I have enclosed.... MMFs are almost completely unleveraged. Banks and bank holding companies leverage their capital approximately ten to one.... Because MMFs do not leverage their capital, they do not "create money" in the way that banks do and they thus do not create systemic risk the way banks do. You point to a historically isolated event affecting MMFs during the financial crisis as a justification for drastic reforms that industry experts say would incapacitate MMFs -- namely, the breaking of a dollar by the Reserve Primary Fund. You assert that "the most acute phase of the crisis" was precipitated by a "disastrous run" on MMFs. You fail to mention the devastating runs on over-leveraged bank-sponsored asset-backed commercial paper ("ABCP") in 2007 that left the banking system effectively insolvent and marked the beginning of the crisis, without any run on MMFs. You point to a "general run on money funds" after a single MMF broke a dollar in 2008 but nowhere do you mention the word "Lehman" or allude to the Fed's disastrous decision to allow a systemically important financial institution fail contrary to expectations it created."
